WASHINGTON - U.S. non-farm payrolls for September probably fell by the smallest amount in a year, more proof the economy is pulling out of recession, but the jobless rate likely ticked up, according to a Reuters survey.

Employers have sharply cut back on layoffs but hiring has yet to take off, putting a damper on domestic demand. That has left many analysts doubting the economy's recovery from its worst recession in 70 years will be sustainable once the government's various spending programs end.

The survey of 77 economists forecast employers cut 180,000 jobs in September, which would be the smallest amount for any month since August 2008. Payrolls declined 216,000 in August.

The unemployment rate was seen edging up to 9.8 percent, a fresh 26-year high, after rising to 9.7 percent in August. The Labor Department will release the employment situation report for September on Friday at 8:30 a.m.

Everything we have right now is just a temporary recovery because of the end of the inventory cycle and the fiscal stimulus measures, said Harm Bandholz, an economist at UniCredit Markets and Investment Banking in New York.

Most of the impact will wear off somewhere at the beginning of next year and the question is where will the ongoing support for the recovery come from? Without the consumer there won't be any strong and sustainable recovery.

Analysts expect the unemployment rate to peak around 10 percent either by the end of this year or early 2010.

LABOR MARKET HEALING

Non-farm payrolls have snapped back from a trough of 741,000 job cuts in January and analysts reckon there is scope for September's report to come in better than what the market is currently anticipating.

They cite an improvement in employment indicators such as the downward trend in new weekly applications for insured state unemployment benefits during the payrolls survey period.

We expect a 150,000 drop in nonfarm payrolls in September, the smallest decline since July of last year, just before employment and the economy plunged into the darkest part of the recession, said Chris Low, chief economist at FTN Financial in New York.

At the current rate of improvement in the economy, payrolls are on track to grow by early next year.

The improvement in the labor market will likely be reflected across all sectors of the economy, despite mixed readings in the employment components of some of the regional manufacturing surveys, analysts said.

A pickup in new resident construction projects could see fewer jobs lost in construction, while an improvement in the overall economic picture translates into a moderation in the pace of layoffs in the services sectors.

September's employment situation report will contain preliminary benchmark revisions to payrolls estimates for the 12 months to March 2009. Economists at JP Morgan said it was difficult to estimate the direction the revisions would go.

Can we estimate whether the March 2009 benchmark revision will be up or down? Not really. We do not have any information yet from state unemployment insurance records on how employment moved between December 2008 and March 2009, they wrote in a note.

September's employment report is expected to show no change in the average workweek, though the rise hourly earnings probably slowed from August. The average workweek closely correlates with overall output and could shed light on when firms will start hiring.

The average workweek is expected to be steady at 33.1 hours in September. Average hourly earnings were expected to rise 0.2 percent after increasing 0.3 percent in August.

(Polling by Bangalore polling unit; Editing by Chizu Nomiyama)

Unemployment